Growth and exit might seem like unlikely bedfellows, but if you want to get maximum value for your business you need to start planning well in advance.
Topics of DiscussionA recent survey of family businesses, which would be similar in most established western markets, revealed that the number of owners aged between 60-69 has increased from 21% to 37% in the past 3 years.A business has limited value to a buyer, if the person who sells it, will walk out of the door with all the knowledge in his or her head.A prospective buyer of a business will look at the certainty of current revenue and profits being maintained.
A recent survey of family businesses, which would be similar in most established western markets, revealed that the number of owners aged between 60-69 has increased from 21% to 37% in the past 3 years.
Of the total family business owners, 64% would seriously consider selling the business if approached and 20% would sell the business because they wish to retire. These numbers are significant, but only 34% of owners have an adequately funded retirement program.
The survey results indicate that the value of a business is critical to a number of business owners who would like to use the sales proceeds to fund their retirement.
However the number of owners who believe that their businesses are ‘sale-ready’ has fallen from 56% to 44%.
There are a number of steps we would recommend a business owner can take to significantly improve the value of a business. These steps apply whether the owner plans to sell within a few years or carry on for many years.
Prepare a business plan for the next 3 years
Which documents the key aspects of your business and acts as a reference tool for you to develop and maintain the business
The plan should include:
- The specific markets, products and services that you are targeting – what are the technical, environmental and industrial requirements?
- If the existing markets have diminished, e.g. cheaper imports from overseas, what new market opportunities are there? Is there new technology which you can service or utilise? With the accumulated experience and expertise of you and your staff, can you come up with innovative ideas which may be commercially viable?
- Research on your market opportunities (e.g. how valuable are they?) and how your competitors perform in those markets.
- Your plans to market your business.
- Resources required by the business, such as premises, equipment, materials and staffing (including levels of expertise).
- A finance plan to realistically cover anticipated sales, costs, cash flow and loan requirements – a lender is unlikely to fund you without seeing a business plan.
A business has limited value to a buyer, if the person who sells it, will walk out of the door with all the knowledge in his or her head.
A new owner will pay more if the business has good operating systems which apply, with or without the owner being there. This is called systemisation of the business and ways in which this can be achieved are:
- Document the key workflows in the business and who is responsible for the critical actions.
- Train the staff to accept accountability for these roles (and document in their position descriptions).
- In this process, ensure that best work practices are carried out consistently.
- Empower key staff to make “business as usual” decisions without referral to the owner.
- Employ management system software which integrate activities from customer lead generation, to sales quotes, to sales order, to work scheduling and materials ordering, to material receipts and production/service staff time recording, to sales invoicing and accounting.
- A system which provides this (e.g. an enterprise resource planning system or a job management system) will reduce duplication of work (e.g. re-entering details about the customer and their order in different systems) and will enable all staff to have access to information, whatever stage the job has reached.
Advantages of a good management system are
- Work planning is more orderly, which increases customer satisfaction and improves the likelihood of work being completed on time.
- Significantly reduces the amount of crisis management required.
- The clarity of job roles and responsibilities increases job satisfaction for staff and is likely to have them more committed to contributing to the improvement of the business with new ideas.
- Frees up the owner’s time to work on strategies for business improvement rather than the day-to-day issues.
A prospective buyer of a business will look at the certainty of current revenue and profits being maintained.
The value of the business will be enhanced by:
- A good spread of revenue across a number of customers. If 70% of revenue comes from 2 customers, built on a good relationship with the owner over many years, a buyer may significantly discount its value.
- A spread of revenue across a number of market sectors, so that a downturn in one sector can be offset by a gain in another sector.
- A good reputation in its industry.
- The staff culture within the business. If there is a good mix of experience and expertise, coupled with a desire to move and innovate with changes in technology and markets, this will give confidence about the longevity and success of the business.
The suggestions made above are not a quick fix and can take years to implement. However they are a very sound investment – they can be valuable in ongoing profitability and when the time comes to sell the business; they also make work life more enjoyable and fulfilling, both for the owner and for staff.